Pricing Strategies and Promotion Best Practices

By Erik Osborn, Business Consultant at Revionics

Price optimization works best when the retailer is confident in their pricing strategy for their business and the product categories they carry.  For this reason, we chose to blog about the importance of defining category role when approaching any pricing initiative – whether your initiative is around everyday price optimization, promotion planning, and markdown optimization.

The industry standard model for Category Management is an 8 step process. The 8 steps are:

1.    Define the Category (i.e. what products are included/excluded).
2.    Define the role of the category within the retailer.
3.    Assess the current performance.
4.    Set objectives and targets for the category.
5.    Devise an overall Strategy.
6.    Devise specific tactics.
7.    Implementation.
8.    The eighth step is one of review which takes us back to step 1.

First, we will focus on the importance of step 2 in building an optimal pricing strategy.  Defining the role of the category within the retailer is really done by defining what is important to your customers, and knowing what is important to your customers is critical in defining your pricing strategy.  There are ways to get to this information in your historical sales data by measuring key metrics to truly define what is important to your customers.

Once you’ve defined your category roles you can then set a pricing strategy for each role.  That way you are pricing all of the items that are most important to your customer according to desired outcome.  Your customers will be happy if the items important to them are priced correctly and reward you by coming back.  Some things to consider would be the competitive position of each of those roles, elasticity of the products in each role, and goals for each category role.

In addition to the Revionics Life Cycle Pricing Solutions, our Business Consultants are available to help our customers identify and shape the roles of their categories.  Category Role Definition is one of our more popular services, as retailers fight to keep share of wallet while protecting margins.  Category Role Definition includes determining the proper category role and subsequent strategy based on elasticity, demand forecasting, and promotional lift from your historical sales data.  Revionics can then directly implement those strategies within our Price Optimization solution by configuring the system to reflect the retailer’s strategy.  For more information please visit www.revionics.com or email us at info@revionics.com.

A Group Contribution from the Revionics Consulting Team

If any of us had a crystal ball, we would most likely be enjoying a relaxing life somewhere, as we would have foreseen the recent changes in our economy and been better prepared to weather the storm. But since most of us are not privileged to that mystical tool, let’s talk about a few things we should all have on our immediate radar and be planning for as we look to the coming months.

1. Stabilization of the economy: Even though home prices are still slumping, and the jobs picture is only seeing slight glimmers of hope on the horizon, it appears that the worst recession in 70 years is behind us. Retailers that have been able to manage inventory and pricing through this turbulent time are well positioned for the future. As the economy begins to gain momentum over the coming months it will be important for retailers to continue focusing on KEY elements of their business that have defined them to their customers. Things like value proposition, loyalty, service, and value-added benefits need to be safeguarded and used as spring boards into the future. The ability to engage in predictive analytics or Future Planning will be paramount as we exit this economy. Being able to create “what if” scenarios in a real-time environment, such as is possible with Revionics Planning will allow retailers to keep ahead of the curve.

2. Shifts in consumer behavior: According to IRI’s recent FMI Economic Trend analysis for 2010 – “Consumers began embracing a range of money-saving strategies as means to survival earlier in the recession. They have quickly become engrained, and all indications are that consumers will continue with these tactics for the foreseeable future.” Consumers have become very value oriented. It is important to remember that value is an equation, not just a price point for the majority of customers.

3. New directions for private label: More consumers across ALL income and age segments are trying private label and recognize the total value of these brands vs. name brands. In the food segment alone, retailers have enormous upside potential in private label initiatives that encourage trial and repeat purchases across food and nonfood categories.

One of the key components to future success is a resetting of their current paradigm to a mentality of leadership rather than that of a follower. This takes a forward-looking approach, using predictive analytics created from and supported by their individual consumer demand indicators. Retailers must continue to evaluate their offerings through the filter of value proposition to their customers. Brand consolidation, based on eliminating confusion within a segment, will allow for better placement of private label offerings for continued penetration and profitability. Product planning, including an understanding of the role and interaction of each product, is critical to achieving maximum success at the enterprise level. Penetration of private label offerings, as well as maximizing the national brand potential, are both tied to this very important effort. Merchandising and advertising tactics that help build the brand in-store will be needed to maximize success in the future.

4. Potential shifts in store cluster dynamics: With virtually all demographic and socioeconomic lines impacted by the economy, what held true for retail store clustering a few years ago might not be true today. Stores that have traditionally catered to an infinite flow of disposable income are today seeing higher redemption of coupons and greater dilution from ad shopping than ever before. Specialty departments are suffering or are being closed in many of these stores. Revionics Consulting group can assist retailers in determining if their current zone structure is relevant with the recent changes. We can assist in determining if current stores are in the correct clusters and if the appropriate number of zones are being used to maximize profitability.

5. A balanced approach to promotions: With the consumer focus on value, and manufacturer’s willingness to invest in promotions rather than cost reduction, we have just gone through one of the most promotionally intensive time frames in recent retail history. While price and promotion have become a bigger differentiator than ever before, a merchant’s ability to control the MIX of prices through optimization and promotional pricing tools will help keep margins on target. The ability to evaluate the effectiveness of promotional offers and their impact on lift, affinity, cannibalization, and contribution to profitability at both the category and enterprise levels is crucial. Strategic pricing, both everyday and promotional, supported by technology continues to be recognized as an enormous opportunity for retailers. An integrated approach to all aspects of the pricing lifecycle, such as is offered by Revionics, will be critical in making the most of the pivotal time ahead.

Even though the immediate future still appears rocky, there does seem to be a brighter future just around the corner. Revionics stands ready to assist retailers in navigating these emerging waters with its full suite of lifecycle pricing tools and consulting resources.